28 March 2018

A&O creates world's first blockchain structured product

Allen & Overy created the product in its technology innovation space Fuse, where tech companies, lawyers, technologists and clients collaborate on legal, regulatory and deal-related solutions.

Allen & Overy has launched the first structured product to be transacted and custodied using blockchain. The product, a GBP principal protected note linked to the FTSE 100 index, is registered, cleared and settled on the Ethereum blockchain and was created in Allen & Overy’s tech innovation space Fuse. Created by Marex Solutions, in partnership with Chartered Opus, the product uses the ResonanceX multi-issuer platform developed and connected to the blockchain by Nivaura to automate price discovery, issuance and administration. Allen & Overy provided advice regarding the legal documentation and, as a first in this space, the product has been executed within the FCA’s regulatory sandbox.

Market disruption

Distributed ledger technology has the potential to disrupt the trillion-dollar structured investment product markets, which are increasingly being sold in higher volumes, but for smaller notional amounts. This makes the pre, post-trade and custody costs highly significant. At present, a few large players dominate the various elements of the value-chain, from manufacturing and distribution, to custody, clearing and registration. According to Allen & Overy, blockchain opens-up this market to best-of-breed niche firms which can come together to create competitive products, a development that disrupts the traditional finance models that relied partly on centralised trust to earn revenue. 

Blockchain benefits 

The firm says that for investors, the advantages of blockchain in structured products includes reduced costs, with blockchain potentially removing intermediaries. It also creates fewer opportunities for data manipulation, with blockchain acting as the database. There is less chance of human error associated with handling such transactions whilst also ensuring faster settlement, reducing the current settlement cycle from two-days to minutes, if not seconds. Blockchain also offers greater transparency, with holdings already backed by securities. The next development is to fully tokenise issuance and administer lifecycle events and payments via smart contracts.

Significant impact

Allen & Overy partner Philip Smith commented: 'This transaction builds on the work we’ve already done with Nivaura to carry out the world’s first fully automated cryptocurrency-denominated bond issuance that was also cleared, settled and registered on a public blockchain infrastructure. The launch underlines the idea that developments in distributed ledger technology are going to have a significant impact on the capital markets.' Richard Cohen, senior associate, added: 'This issue demonstrated how distributed ledger technology can facilitate clearing and settlement, without requiring a traditional settlement system infrastructure and the cost and complexity that can bring.'

Reduce production costs

Guillaume Chatain, CEO of ResonanceX, the multi-issuer platform responsible for arranging and distributing, commented: 'With this first ever blockchain issuance conducted in parallel with a traditional issuance via Clearstream, we’re not only demonstrating that our fully automated multi-dealer platform is well integrated within existing capital market systems, but that we are committed to use technology and the benefits of decentralisation to further reduce production costs. This will ultimately translate into lower minimums and better economics in the structured products ResonanceX will distribute.'

Niche specialists replace traditional finance

Nilesh Jethwa, CEO, Marex Solutions, commented: 'Technology is disrupting traditional finance by allowing niche specialists to take the place of larger organisations.  By being able to provide these products more cheaply, quickly and securely will, we believe, raise the bar for the industry.'